American International Group Posts Huge 4Q Profit on Tax Benefit

Bailed-out insurance giant American International Group Inc. (NYSE:AIG), boosted by a one-time accounting gain, reported a huge fourth-quarter profit Thursday. Favorable stock market conditions also helped offset large losses stemming from last year's floods in Thailand.

Net income for the New York-based insurer rose to $19.8 billion from $11.2 billion a year earlier, when AIG booked gains from the sale of businesses, the company said Thursday.

AIG's operating income, which excludes the tax benefit and some investment results, was 82 cents a share, beating analysts' consensus estimate of a 63 cent profit per share.

Favorable Stock Market

"The one thing that kind of worked against AIG is the low interest rate environment," said Jim Ryan, an an analyst at Morningstar Inc. "On the other hand, that's offset by a pretty good stock market in the fourth quarter."

Fourth-quarter results were helped by a $1 billion increase in the value of AIA Group Ltd., AIG's Asia life insurance unit. As part of AIG's efforts to repay the government bailout, AIG took AIA public in Hong Kong in 2010 but retained a one-third stake.

Shares of AIA appreciated 8.3 percent in the last quarter of 2011.

Under mark-to-market accounting, AIG records substantial profits when AIA shares rise. But when the stock falls it also generates great losses. At the end of the third quarter, AIA was valued at $11.3 billion.

Thailand Floods

AIG's fourth-quarter results were hurt by $467 million of catastrophe losses, including $368 million related to the Thailand floods, compared with $203 million of catastrophe losses in the fourth quarter of 2010.

AIG has a 2.6 percent share in the Thailand property and casualty market and potentially even more exposure from global accounts.

One-Time Tax Gain

AIG boosted its revenue by eliminating a valuation allowance against deferred-tax benefits.

AIG noted in its third-quarter 10-Q filings that it "is possible that the valuation allowance could be released in large part in the fourth quarter of 2011, which would materially and favorably affect net income and shareholders' equity in that period."

The company said it released $17.7 billion for the fourth quarter in deferred tax asset valuation allowance.

Deferred-tax assets typically consist of tax-deductible losses and expenses carried forward from prior periods. Companies can use these past losses to lower future tax bills.

Under generally accepted accounting principles, such carry-forwards are valuable only to companies that are profitable and paying income taxes. If a company doesn't expect to fully use these assets, it is required to record what is called a valuation allowance on its balance sheet to reduce their carrying amount.

The release means AIG can earn enough taxable income in coming years to take advantage of all the tax benefits and the company will not pay taxes in the coming years.

Stock Performance

"The primary thing that's holding back AIG's stock is the government's ownership," Ryan said.

The government rescued AIG from the brink of bankruptcy in September 2008, at a price tag that exceeded $182 billion. The Treasury still owns a 77 percent stake in what was once the world's largest insurance company.

"Unless you get that out of the way, it's going to be a constant overhang because you are always worried when the government might be selling their shares, which will drive down the price," Ryan added.

American International Group Inc. (NYSE:AIG) shares jumped 5.29 percent to $29.47 in Thursday's after hours trading. The stock lost half its value in 2011 but has rebounded sharply in 2012. Thursday's better-than-expected earnings report pushed AIG's shares above the U.S. Treasury's break-even point of $28.73 a share on its stake in the company.

One of AIG's main competitors in the insurance industry is the Travelers Companies Inc. (NYSE:TRV). Its shares closed basically unchanged.

Other competitors in the financial sector include: Hartford Financial Services (NYSE:HIG), HCC Insurance Holdings Inc. (NYSE:HCC) and American Financial Group (NYSE:AFG).